Hedge Funds Have Never Been More Bullish On CarMax Inc (KMX)

Nina Todic

Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of CarMax Inc (NYSE:KMX) and see how the stock is affected by the recent hedge fund activity.

Is CarMax Inc (NYSE:KMX) going to take off soon? The best stock pickers are becoming hopeful. The number of bullish hedge fund bets improved by 10 in recent months. Our calculations also showed that KMX isn't among the 30 most popular stocks among hedge funds.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Tom Gayner

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a look at the latest hedge fund action regarding CarMax Inc (NYSE:KMX).

How are hedge funds trading CarMax Inc (NYSE:KMX)?

At Q2's end, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 34% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in KMX over the last 16 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

No of Hedge Funds with KMX Positions

More specifically, Akre Capital Management was the largest shareholder of CarMax Inc (NYSE:KMX), with a stake worth $527.8 million reported as of the end of March. Trailing Akre Capital Management was Markel Gayner Asset Management, which amassed a stake valued at $426.6 million. Holocene Advisors, D E Shaw, and Palestra Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Consequently, key hedge funds have jumped into CarMax Inc (NYSE:KMX) headfirst. Holocene Advisors, managed by Brandon Haley, established the most valuable position in CarMax Inc (NYSE:KMX). Holocene Advisors had $128.5 million invested in the company at the end of the quarter. Michael Pausic's Foxhaven Asset Management also initiated a $60.6 million position during the quarter. The following funds were also among the new KMX investors: David Harding's Winton Capital Management, Ken Heebner's Capital Growth Management, and Richard Chilton's Chilton Investment Company.

Let's also examine hedge fund activity in other stocks similar to CarMax Inc (NYSE:KMX). We will take a look at Okta, Inc. (NASDAQ:OKTA), Apollo Global Management, Inc. (NYSE:APO), American Airlines Group Inc (NASDAQ:AAL), and Wynn Resorts, Limited (NASDAQ:WYNN). This group of stocks' market values match KMX's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OKTA,39,1259179,-4 APO,23,1702873,5 AAL,34,2010537,-7 WYNN,39,1943762,-5 Average,33.75,1729088,-2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $1729 million. That figure was $2156 million in KMX's case. Okta, Inc. (NASDAQ:OKTA) is the most popular stock in this table. On the other hand Apollo Global Management, Inc. (NYSE:APO) is the least popular one with only 23 bullish hedge fund positions. CarMax Inc (NYSE:KMX) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately KMX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on KMX were disappointed as the stock returned 1.3% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks (view the video below) among hedge funds as many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Disclosure: None. This article was originally published at Insider Monkey.

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